Friday, January 29, 2010

Believe it or not, much like last Friday the question right now is how fast could the market crater?

Inasmuch as last Friday's negative crescendo to a poor, holiday-shortened week — finishing more or less on the lows — did not prove as foreboding as, indeed, appeared possible ... today's similarly negative close — finishing out the week, as well as January 2010, more or less on the lows — no doubt doubles, one might reasonably think, next week's negative potential.

In hindsight, then, last week's "foreboding" might simply have been the setup for this week's decidedly negative culmination to the first month of 2010.

One thing I will add to this year's "January Barometer" is the fact that, many major indexes also registered an "outside" month, trading both higher and lower than respective ranges established during December 2009 and, furthermore, settling below respective December lows. In all the years over which it is my contention stocks have been distributed from strong hands to weak — namely, the years 2000-present — an outside month settling below the prior December low never before has happened.
I don't necessarily wish to elevate the negative portent of either this year's "January Barometer" or the fact that January 2010 was an outside month whose close was terrible. Yet adding these things to my technically well-developed, extraordinarily bearish outlook, how does one not begin thinking...

I got blessings on my forecast (so to paraphrase).
Look at that. It is all bad. Dive, dive, dive!
Unknown is whether a first wave down from January's top and a second wave up, correcting this, have formed, and whether, now, a third wave down has commenced. This is entirely possible. Certainty about this should likely come first thing Monday morning, too.
Bear in mind it is possible the European Union won't collapse this weekend. Although by the sound of things this could happen any day now, according to EU Monetary Affairs Commissioner Joaquin Almunia, there's no need to fear the worst...

Is it just me, or does this performance evoke shades of Alan Schwartz a couple days before Bear Stearns was taken out?

Thursday, January 28, 2010

As you can see, each new "higher low" was matched with wisdom — right fear — to increase Put option hedging of long positions. Likewise, given hindsight, demonstration of such "right fear" indicated a vested interest was buying time allowing prices to drift higher.

It is, of course, my contention this "vested interest" is intermediate-term bearish. These are strong hands squeezing weaker shorts, as well as skillfully trimming long inventory and raising capital to pay for hedges in the process.

But this is neither here nor there at the moment, for you see this "vested interest" is behaving differently at the present "higher low." Long position hedging is seen contracting. Hmmm.

This begs the question, then: have strong hands sufficiently trimmed their long positions?

Judging by reduced Put option buying at this "higher low" it appears so.

Add to this the evaporation of yesterday's relative strength divergence (on the daily) and there's further evidence supporting the possibility top is in. Marked acceleration of downside momentum (MACD) in the course of establishing the present "higher low" is but icing on the cake.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Way back in early-2003 this similar condition was the essence of things which at that time were signaling an approaching bottom, this as seen on daily charts of major indexes. Shades of the same price/RSI configuration have been evidenced over the past few days, as seen on charts plotted at 5-minute intervals...

Today, especially, you see the kind of diverging price/RSI performance wherein fear remains a fixed part of the equation. This is reflected by the fact that, as the S&P 500 traded lower, RSI, although positively diverging, remained on the sell-side of its balance (i.e. below 50).

Like I said, this same kind of thing (on daily charts) happened back in early-2003. Its occurrence provided a piece of evidence then that, while selling was becoming exhausted, the bid providing support was neither irrational nor imbalanced. Rather, stronger hands could be thought behind the bid.

Now, from my perspective such observations, of course, are taken in context of Elliot Wave possibilities. So is the case, too, regarding this present projection for a "bounce/bottom."

As such, then, were top in, a "bounce" correcting the initial move down can be expected. And were top still ahead — its manifestation proving further illusive despite a wealth of evidence supporting my view that, the rally off March '09 bottom is but a counter-trend rally in a larger bear market — then the next turn higher appears at hand.

Per this latter possibility, there have been many instances already where, the slightest of RSI divergences have presaged yet another turn higher in benchmarks like the S&P 500, but with nothing momentum-wise (MACD) to further account for this. Quite the contrary. Such has been life these recent months.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Tuesday, January 26, 2010

This much is certain: the credibility of the Federal Reserve and the U.S. Treasury is coming under attack like never before. Yet issues involving these institutions extend far beyond the personalities of Bernanke and Geithner. Rather, the real battle is over policy.

Right now, the question is how long can men wielding puny .22 caliber pistols maintain control over the battle field. The minute some organized division within the body politic joins the battle armed with heavy artillery it is game over.

Truth of the matter, too, is this alone offers the surest hope of ever restoring the credibility of capitalism.

Per Bernanke and Geithner, the problem is not their marksmanship. Rather it is mistaken belief each is firing a canon when instead they are beating credibility with crazy sticks. Were the policies of this pair of Monetarist Monkeys not such a clear and present danger to domestic Tranquility and the general Welfare, then there might not be much issue. Yet it is for the very threats the likes of these represent that, the U.S. Congress is given constitutional power to legislate bankruptcy laws (Article I, Section 8). This is the heavy artillery for which any investor desiring some modicum of stability awaits. This is the arbiter burying those political representatives embarassingly exposed to being among a dying breed whose irreversible pangs struck yet again in Massachusetts last week.

The likes of [retiring] Senators Kent Conrad (D-ND) and Judd Gregg (R-CT), who in the great body of the U.S. Senate would propose policies that could only hasten demise into chaos, are, without doubt, worthy of such scorn as secures their silence. You boys have gone off the imperialist deep end thinking "sound policy" is an outside commission determining cuts in the government's budget. Is not the point of "representative government" giving the people, at all times and at all levels of representation, a voice in such matters? Is this not the point of it all? And sound policy is taking this away? WHO do you work for?

Everything to do with stability hinges on power to legislate Bankruptcy Laws. Everything to do with any purposeful hope for peace and prosperity requires bankruptcy reorganization, and now. Without this, credibility is wasted, and every day this situation passes is another day risk of an irreversible collapse grows. We lose credibility not reorganizing, purposing to attain far greater stability than presently has come to pass.

Surely, there's much better than yesterday's ill-disposed leftovers to carry forward American leadership. What circumstance exists, right now, but weakens this.

A special Elliott, impulse wave called a wedge possibly has formed in the S&P 500 since March '09.

(What makes a wedge "special," form-wise, is the fact each of its five waves subdivides into three waves. Typically waves 1, 3 and 5 subdivide into five waves. Also "special" is certain forecasting value a wedge provides.)

By rule a wedge occurs in the final move in the given direction of a larger Elliott Wave trend. Wave C is the final wave in an A-B-C [upside] corrective wave that began November 2008.

Technical substantiation of this rising wedge possibility is rather compelling. RSI and MACD no doubt provide solid confirmation of every aspect an Elliott Wave analyst might consider about this "special" wave form, as regards both its unfolding and its place in the big picture.

The one consideration most responsible for restraining me from proposing this view thus far simply is the size of it. The S&P 500's advance off March '09 bottom seems hardly fitting a move the Elliott Wave Principle describes as ending a larger move that traveled "too far, too fast."

Yet think of this from perspective of the past twenty years. Think of liabilities built up, compounding leverage on a dispersed physical asset base. Recall glory bidding up financial assets whose "value" was being "unlocked" in leverage billed as "risk mitigation." As is always the case with financial bubbles, all goes swimmingly during the bubble's inflation. It's after the pop things come unglued.

And now an Elliott Wave form suggests the Great Credit Inflation of 1987-2007 took the S&P 500 "too far, too fast," and so imminently faces its greatest challenge yet. This conclusion is born of the Elliott Wave Principle, itself, as a rising wedge typically is fully retraced, and at a considerably faster pace than taking to form.

No doubt a possibility fitting my greatest fear! Thus, the best course of action still remains confidently disposed toward battening down the hatches. This position lives by overwhelming technical confirmation of an extraordinarily negative Elliott Wave-based point of view.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Monday, January 25, 2010

Not long ago I wrote about the growing prospect of trade war, 21st century style. It has begun...

January 19 – Bloomberg (Veronica Navarro Espinosa): “Brazil’s success in curbing the rally in the real by imposing a tax on foreigners’ purchases of stocks and bonds is a ‘scary’ and ‘dangerous’ precedent, said Citigroup Inc. equity strategist Geoffrey Dennis. The success of the tax may encourage officials to adopt more measures to stem the currency’s appreciation, Dennis said… ‘It’s kind of scary because it might mean that the government wants to do more things over time should the currency stay strong,’ Dennis said.”[Read More]

This war, funded by out-of-control, currency wrecking Monetarist Monkeys only threatens to grow...

January 21 – Bloomberg (Shamim Adam): “Developing Asian economies face the risk of asset bubbles or overheating as the region’s growth outpaces the rest of the world this year, the World Bank said. Developing East Asia… will expand 8.1% this year… South Asia will grow 7% in 2010, it said.”[Read More]

January 21 – Bloomberg (Paul Abelsky): “Russia must take steps to prevent the overheating of assets in the first half amid ‘an obvious excess of liquidity’ in the economy, German Gref said. ‘Today the herd instinct in the presence of an utterly excessive money supply is leading to the artificial pumping up of the price of the stock market and all types of commodities, and it’s obvious that we’re going to see another expansion of this bubble,” the OAO Sberbank chief executive officer told a conference…"[Read More]

Nice high-volume break below the neckline of a head-and-shoulders top in Goldman Sachs. Thus, the vicinity of $125 appears in the cross hairs ... this following a prospective reaction back up to the neckline over days ahead.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Friday, January 22, 2010

As you get older days fly by. Yet, like everything else, there's always an exception...

Today ended what seemed one of the longest, 4-day weeks ever!

And wha la! Clarity...

Like last Friday, relative strength was sold down to an extreme (below 20). But unlike last Friday, there was no recovery today. Heck, not even a price-RSI divergence yet. So, there's nothing even indicating a bounce is imminent!

What this means, then, is Monday could get ugly. The greater bulk of fast fading technical measures unanimously confirm this.

Or will it be another resignation? What precedent hath Chris Dodd wrought! Yet more than changing personalities, only changing policy could subdue a growing discontent. And has there ever been in all of American history so much abundant opportunity for doing this peaceably? "The man" is so incredibly vulnerable now. Never should have let things go sub-prime, I believe.

Technical similarities present in 5-year U.S. Treasury yields, now versus early-2002 ... just before the stock market began to crater ... caught my attention.

A coming rush into the safety of U.S. Treasuries (desperately seeking yield) could very well be a coming, common theme.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Thursday, January 21, 2010

Doped-up horses, leveraged to the teeth, long past have left the barn. Before giving any thought to corralling these wild beasts, the dope and its dealers first should be removed from the stables. One problem: the dealers bought the farm! So long as there is a prevailing mentality among ranch hands defending such fallacies as "AIG had to be saved," then what stability, really, can come rebuilding the wall separating commercial and investment banking? Geithner, Bernanke, Summers, and countless other Adam Smith lovers in Congress best be let go first, then we can begin rebuilding confidence. However, not even this is sure to radically alter the present, Monetarist Monkey-centric dynamic, because the man at the top remains on the same page as these others. Indeed, that the President's proposal comes one year too late and a Senator short of an absolute majority rather makes the exercise in regulatory religious revival more suspect than credible.

The more pliant and accommodating, less penetrating financial press and its thoroughly debunked, British school bent is hardly worth serious engagement on this matter. Are you listening to these people? Out of their collective mouths we hear so much mindless banter about threats to "free market principles" the banking system's more restrictive regulation purportedly presents, and yet no one bothers to wonder how the financial system and the global physical economy became such an unmitigated disaster requiring unprecedented intervention, given how efficient the vaunted god of the free market is claimed to be.

Besides, the administration's proposal for restoring greater regulatory oversight of the banking system probably had very little to do with today's sell-off. Maybe you didn't notice, but the BKX was among the day's best performing sectors, down only one-half percent.

Rather more likely responsible for today's thumping was the triumph of the American people in defeating the legislative effort to gut the nation's health care system in the hope of freeing capital needed to sustain the bailout regime. Yet not even so much this particular, momentary victory should be thought a serious impediment disrupting Team Fraud. Instead, a Mass Strike movement's strengthening — revealed, first, in Massachusetts on Tuesday, and then again today, with the Speaker of the House of Representatives surrendering — is the more ominous threat bedeviling Team Fraud.

A fantasy-filled financial press thoughtlessly yapping about the supposed threat presented by proposed, stricter banking regulation ought rather be contemptuously regarded than taken the least bit seriously. Good lord, how ever did the financial system and the physical economy prosper for over fifty years while Glass-Steagall was the law of the land? Considering this you might sooner suppose some diversionary tactic hoping to steer attention away from matters at the heart of the Mass Strike movement rather is at play.

As you can see, with this little judicial nuisance out of the way, it was time to celebrate in Omaha. Yet one wonders whether the bullish spike in Buffett is pricing in the possibility of missing rail spikes sometime over months ahead?

Such risk does not at all seem far-fetched, given real climate change sweeping the nation.

High volume breaks in the stocks of companies greatly benefiting amidst a much-despised, attempted bailout of a hopelessly insolvent financial system is an eye-catching turn of affairs. Still, given these are companies among a group that, more or less flat-lined over the past five months, levitating while broader-based benchmarks inched higher, one is hesitant to suppose an anticipated bloodbath likely has commenced. Months spent defying growing technical weakness temper willingness to go out on that limb just yet.

Still, bottom line, political cover needed to perpetuate bailout priorities necessary to sustain the viability of a fragile financial system is fading fast. Furthermore, the pace of retreat should only quicken as election day draws nearer. No matter what one might reasonably suspect about the sincerity behind reactionary policy proposals such as Glass-Steagall 2.0, the fact of the matter is none of this is occurring in a vacuum. Discontent feeding a Mass Strike movement is a growing threat to the guiding principles of a wildcat financial system teetering on the edge of collapse.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Wednesday, January 20, 2010

Continuing with yesterday's analysis of the poor state of leadership lifting the stock market higher off March '09 lows, a few additional things are worth noting.

Having revealed how, starting October '09 ... once the NYSE Composite finally was trading higher than a year earlier ... the number of NYSE-listed issues reaching new 52-week highs did not at all expand by any significant degree, one might think my calling the market's leadership "thin" but an arbitrary characterization coming from a bona fide bear. So, let's put a number to it...

There are 3866 listed issues on the NYSE. Over the past few months since mid-October 2009 — a duration over which the NYSE Composite Index consistently has traded at or near its highs for the prior 52 weeks — the 50-day moving average of the NYSE new 52-week high-low differential has ranged in the vicinity of ballpark 150 - 200. Taking today's 50-day moving average of 204 and dividing this by 3866 NYSE issues, we come up with slightly more than 5% of NYSE-listed issues leading the charge higher.

That's thin.

While we're at it, let's take a look at the same situation on NASDAQ, because, no surprise, leadership is nyet...

As you can see, unlike the NYSE's new 52-week high-low differential, NASDAQ's has yet to exceed its October peak. Thus, once again, failed leadership is revealed under the covers on the Pump & Dump.

But wait. There's more...

Taking today's 50-day moving average of NASDAQ's new 52-week high-low differential (95) and dividing this by the number of NASDAQ-listed issues (2740), we come up with a grand total of 3.5% of NASDAQ issues, on average, leading the charge higher. There's a word for this so-called "tech leadership" you hear so many analysts proclaiming...

Pathetic!

Now, per this matter of thin leadership, you might wonder what's the big deal in the grand scheme of things? What does it matter?

Quite simply thin leadership reflects AWOL animal spirits necessary to sustain the market's advance off March '09 bottom. But one more sign all things are not what they seem...

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Tuesday, January 19, 2010

Let's take a look under the covers and get an objective sense of the broad market's health. As you know, the case I make regarding the counter-trend rally off March '09 bottom is all things are not what they seem. This is to say conditions supportive of an advance with staying power simply are not present.

This conclusion is substantiated contrasting index performance with coincident technical measures and noting how the latter belie the former. Tonight, we will demonstrate this via the NYSE new 52-week high-low differential...

First, set your sight on early-October 2009. Post-March '09 bottom, this was the first instance when the NYSE Composite traded above levels of one year prior.

With this in mind, then, the marked bump higher in the NYSE new 52-week high-low differential, starting in July '09 and carrying into September seems rather impressive. Remember, the NYSE Composite at that time was trading below where it stood a year earlier, so the expansion in new 52-week highs appears noteworthy. Or at least it would seem anyway...

That is until you consider the NYSE new 52-week high-low differential from mid-October '09 to present ... at a time when the NYSE Composite was trading well over 60% higher than its worst levels during the year prior.

Right off the bat, the relatively modest expansion in new 52-week highs during October '09 (in comparison to September '09) is conspicuous considering that, the year prior (October '08) the NYSE Composite was not only crashing lower, but something on the order of 89% of all NYSE-listed issues were setting new 52-week lows (an all-time record!).

Given this, the NYSE new 52-week high-low differential should have risen parabolically during October '09, as the NYSE Composite rose to a new high, post-March '09 bottom. Yet this was not the case at all. Again, the increase in the NYSE new 52-week high-low differential was only relatively modest.

Strange, no? No! Not when NYSE leadership is thinner than Gandhi.

Now, at the moment I can only speculate what was behind the bump in the NYSE new 52-week high-low differential from July-September '09. I would be willing to bet the greater preponderance of NYSE-listed "issues" setting new 52-week highs over that interim were ETFs, some possibly not even existing a year prior, and some likely anchored to the bond market (corporates, municipals, junk, etc). To a much lesser extent, that thin minority of NYSE-listed issues not registering new 52-week lows from October '08 - March '09 also might have been setting new 52-week highs from July-September '09. (Just how many of these likewise were among those relatively few issues perceived "safe" by the fact they are widely held is unknown.)

Bottom line is far more NYSE-listed issues should have been registering new 52-week highs from mid-October '09 onward. Yet what instead has been revealed is just how incredibly thin is NYSE leadership behind the post-March '09 counter-trend rally. Considering this in conjunction with the added disparity revealed via the NYSE cumulative advance-decline line, the case previously made suggesting NYSE-listed issues are being distributed finds further substantiation, as does conviction that, the market's advance off March '09 bottom is, in fact, but a counter-trend rally in a larger bear market.

A few final items of note here...

First, despite the NYSE Composite having exceeded its October '09 peak on a number of occasions over the past three months, the NYSE new 52-week high-low differential did not exceed its October '09 peak until January 11, 2010 (on the day the NYSE Composite set its intra-day high, post-March '09 bottom). End of year (2009) "window dressing" delivered a slight surge in the high-low differential ... and start of year (2010) positioning a further surge still, at last taking the differential to a new high, post-March '09 bottom.

As I mentioned following this, January 11th's "technical confirmation" of the NYSE Composite's move higher, one ought expect the index to trade a bit higher still as a result. Yet look how already the new 52-week high-low differential is coming in as the NYSE Composite challenges its January 11th high. Only further is leadership thinning as the NYSE Composite trades very near its peak, post-March '09 bottom.

This begs the question, then: is this a technical divergence signaling top, or is a more pronounced divergence yet to develop? Time will tell.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Friday, January 15, 2010

Highlighting the fact yesterday that, Team Fraud increasingly finds its position in jeopardy, I neglected to mention one telling sign of the times is JP Morgan Chase CEO Jamie Dimon's whining, "I'm getting tired of the constant vilification..." Apparently, the strain of having lost ability to paper over past securitization frauds with new ones is taking its toll. Not just on Dimon, but on his company's balance sheet, as well.

Of course, no shortage of Monetarist Monkeys still cling to fantasy believing our every financial problem can be solved with an ever-larger wall of money. Trouble is insurers of risk appear to recognize that, the lender of last resort is becoming overexposed in its desperate attempt at staving off insolvency of huge swaths of credit securities.

This begs a most relevant question...

Has it occurred to anyone that, at the core of everything finance touches ultimately lies confidence? Indeed, were you to study any number of prior financial panics, you invariably would discover confidence is a most critical matter whose relevance is given vague consideration at best.

Surely, once a crisis overwhelms the prevailing status quo, restoration of confidence is no small dilemma easily resolved. Likewise, no mere financial backstop can by itself soon restore conditions to a pre-crisis state. This appears the inescapable conclusion looking back at notable panics occurring during the late-19th and early-20th centuries.

Indeed, more recently, too, following the post-Y2k bursting of the so-called tech bubble, credit securities made on Wall Street (a la "the Greenspan put") were inflated to the stars. Yet this ocean of new "money" (described by Goldman Sachs' Robert Hormats as "the greatest flood of liquidity since Noah) did not find its way into NASDAQ-listed issues in any manner resembling pre-crash mechanics. Why not? Because confidence in the dream spun during NASDAQ's Y2k run-up was in ruins — crushed by the rush out of securities whose prices had, in fact, reached fantastic levels lacking any durable credibility well-founded in historic reality.

This same dynamic involving lost confidence is likely to vex investors trapped in belief real estate prices generally travel on a one-way street. Again, no financial backstop, no matter how seemingly creditworthy, can soon restore confidence lost as a result of some profound defiance of sound financial judgment.

Yet none of the dashed dreams upon which financial panic already has visited holds a candle to the incredible fantasy that is the "full faith and credit" of the U.S. Treasury backing the dollar reserve, global financial system in its present state. The very idea set upon a nation dependent on huge capital inflows is nothing short of laughable.

Of course, you are free to regard this statement as being nothing but baseless fear mongering. However is not the hallowed free market, itself, effectively saying the very same thing as I am? Sure, sovereign CDS might command a higher premium over investment grade corporate CDS as a consequence of a rather transparent effort to coerce a spirit of austerity among sovereign governments. Yet that such coercion is needed at all — that freeing up capital immediately via cuts in government spending, rather than relying on increases in the global economy's wealth producing capacity — speaks volumes about confidence backing a still grossly over-leveraged physical economy whose collapse thus far presents woefully little sign of reversing.

Panics occur for good reason. Generally speaking, imbalances built up in both the physical and financial economy lie at the root of causes leading to such sudden evaporation of confidence as precipitates an extraordinary wave of asset sales. The most recent instances of this no doubt have many precedents in effect, yet in cause there scarcely are any modern parallels. What's more is we are witnessing firsthand how persistent resistance to declaring an untenable arrangement bankrupt tears away at the most critical underpinning of all: confidence. Were truth otherwise, then the need to know the full extent of issues surrounding the bailout of AIG wouldn't be so pressing upon more thoughtful members of the U.S. Congress. Lacking confidence in the viability of what has been done, if these should be silent, then quite possibly the very stones would cry out (were, say, CDS premium disparities thought unworthy of transmitting an alarming message about the creditworthiness of the lender of last resort).

Despite the many extraordinary measures taken thus far to fill the void left by the collapse of the securitization market, confidence by no means has been restored. If anything, mistrust has only deepened amidst largely unresolved imbalances, now that the sovereign backstop card has been played.

Today's steep drop very well could be the start of an anticipated move back down to March '09 lows. That the distance might be covered in a New York minute owes to profound vulnerabilities whose exposure is threatened by an open airing of circumstances surrounding the AIG bailout, as well as other related affairs whose impact made 2008 a most extraordinary year. That 2009's "Banker of the Year" doth already loathe vilification thus far earned is fair warning to fear what men at their wits end might do in the midst of added public pressure.

Beyond the threat of fraud exposed lies the realm of profound imbalances such as are likely to precipitate panic selling in the face of fading confidence in the lender of last resort. Despite there being no way to ascertain the moment at which panic is likely to take hold, the very fact that fragile confidence rests upon an explosive powder keg that, any vested interest, well- or ill-intended, could detonate in the course of what might be seen in relevant circles, rational action (given present circumstances), is all the reason I need to remain risk averse.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Thursday, January 14, 2010

The writing is on the wall. Everywhere is trouble threatening Team Fraud.

Bankers on the hot seat. Their pet monkey unconfirmed. Boy Wonder at Treasury behaving as though the calender reads 1972...

Oh, so the former president of the New York Fed knew nothing about the AIG memos. Couldn't even tell you what they're about! I don't know, Mr. Haldeman... What will come of it once Congress turns over a few stones?

Storm clouds plainly are building around AIG. Its former CEO now is turning on the company's once partner in crime, and weaving some sort of fantasy not without risk of backfiring.

This could not come at a more inopportune moment either, what with secret health care "reform" negotiations set to produce a bill making AIG one of the primary beneficiaries. Just what everyone is up for(!) ... another subsidy to a 100% bankrupt enterprise made on Wall Street.

So, today we have proposed a "Financial Crisis Responsibility Tax" venturing to distract attention away from the ongoing need for massive subsidization of insolvent financial institutions. Another D.O.A. non-starter? Add zero Senate Republican support plus any number of Senate Democrats up for re-election — you know, the likes whose knowledge of which side their political life's bread is buttered on, such as led to their aye vote on TARP — and the President's bone to those whose trust continues abused (by, say, record foreclosures) has all the look of another surefire policy disaster.

OBVIOUSLY, Team Fraud is in disarray, as its political cover is coming under increasing attack. Likewise, it is growing clear that, in the effort to support a bailout regime time for throwing bones has passed. Thus, the President's ridiculous proposal effectively is signaling status quo alternatives are few.

Here and now, those enterprises at the center of it all are damned if they do and damned if they don't. Indeed, JPM could bring in more revenue than Treasury, or contrarily could announce they are broke. It does not matter, because the financial industry operates in a heavily subsidized environment whose viability is in grave doubt.

Some time ago I suggested that, were March 2009 lows violated this likely would be seen a vote of no confidence in the lender of last resort's efforts to bail out the financial system. This view remains valid.

Yet no matter what doubt in the viability of the present supportive arrangement might be growing, bottom line is the President's crazy "Financial Crisis Responsibility Tax" represents an effort at maintaining some semblance of the current status quo whose defining feature treats a host of derivative credit securities as viable, rather than hopelessly insolvent. Thus, bankruptcy reorganization is meeting continued resistance. Renewed bouts of chaos precipitating attendant efforts to restore "order" in much the same fashion as we have already seen are to be expected, then.

Given this fundamental reality, some better sense forms about when the stock market might collapse, taking major indexes back to levels last seen in the 1987-1994 time frame. Having the other day commented that, over the next 12-24 months we might see a range-bound trade between current levels and the March '09 low, posterity seems well-served developing this possibility.

So, take the Financials Select Sector SPDR which is displaying the same increasing technical weakness as prevails across the broad market. Having rallied more strongly than broader averages off March '09 bottom, the XLF has been in a holding pattern more or less over the past five months, while the broader market has narrowed its disparity with the XLF's gains.

If the XLF reasonably is seen leading the market lower into March '09 bottom ... and now back up ... then its current five month stall ought not be ignored. Nevertheless, though, being a Wile E. Coyote routine, one also could imagine a final burst from that ACME rocket propulsion backpack. Maybe the Great 2009 Squeeze, Strong v. Weak Net Short, has some juice left. Then again, maybe not.

The XLF's island reversal noted back on November 30, 2009 remains intact and, so far, continues presenting upside resistance. My suspicion is resistance will hold, providing further evidence that, deteriorating technical conditions underlying all major market averages are setting the stage for a trip back down to the vicinity of March '09 lows. Of course, this probably will not happen overnight. Yet, though, truth is it could.

Being there are a few alternate Elliott Wave possibilities once the counter-trend rally off March '09 bottom completes the underlying technical character accompanying the market's turn back down should isolate which most likely is unfolding. Probably most relevant right now is determining whether wave (C) will have begun or whether wave (B) still will be forming.

Per the former possibility, waves 1 and 2 of (C) are likely to form above the March '09 low. Per the latter, what I have thus far labeled waves A, B and C of wave (B) forming since late-November 2008 might instead be waves (a), (b) and (c) of wave A of (B). This would mean wave B down toward the March '09 low (unfolding in an (a)-(b)-(c) zig-zag form) and then wave C back up (unfolding in five waves) lie ahead.

Honestly, it probably will be some time before a case can be made about which possible Elliott Wave form is unfolding. Since every effort likely will be made to avoid bankruptcy reorganization of financial institutions stuffed with trillions of dollars of what are now, or likely to become, effectively worthless securities, there is a reasonable case for supposing March '09 low will hold for a time. Yet bottom line is there simply are not enough windmills that can be built for the sake of adding physical capacity to create wealth necessary to assure the viability of existing financial claims. Nor are there enough elderly and poor to send to an early grave, freeing health care dollars needed to bail out the hopeless AIG. So, status quo attempts to paper over increasingly unwieldy financial liabilities are rather likely ... until no one buys the supply necessary to keep everything afloat.

(Per recent secondary offerings of TARP junkies, the absorption of that supply is seen strictly a stopgap necessity. One need only imagine the hit to all financial institutions holding crap similar to that on the books of the TARP banks were their secondary offerings to sink faster than Titanic.)

The Financials Select Sector SPDR certainly bears watching in an environment where the sector remains a driving force likely to be fixed in the political spotlight for some years to come. Per short-term trend leadership the sector might offer, a similar perspective was behind analysis presented here March 21, 2009, discussing how trading in GE late in 2008 appeared to be telegraphing trouble that hit the broad market over the first couple months of 2009.

Now, although the broad market has taken the XLF's lead off March '09 bottom, truth remains the bid's reach only deceptively has carried NASDAQ higher, whose leaders are few and prayers are many. This deserves pointing out once again because absence of animal spirits running wild on NASDAQ, indeed, is keeping March '09 bottom in sight and likewise supporting the thesis that, over the next 12-24 months the wide range established over the past 12 months might very well bound trading.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Wednesday, January 13, 2010

A Seeking Alphaarticle by Chris McKann of optionMONSTER points out that, the ratio of the 1-month volatility index (VIX) and the 3-month volatility index (VXV) "hit its lowest level since May 2008." The article also goes on to note "the lows in this ratio have come at market tops—in December 2007, May 2008 and August 2008."

Of course, it comes as no surprise here a top signal is registering via the VIX. Yet duly note that, the 1-month/3-month volatility ratio "hit a higher low back in July of 2009," too. In other words, given the entire post-March '09 trend's tendency for adding suckers to mainstream consensus (now including perma-bear James Grant), one might suppose this indication of a top might persist for a brief time.

Indeed, the VIX, itself, has come down to the same levels reached when the S&P 500 peaked in October 2007, and again at the end of the March - May 2008 counter-trend rally. Now, at this point it would come as no surprise were the VIX to better these prior readings. Coming at significantly lower S&P 500 levels than those previously, a VIX divergence would be most fitting the Elliott Wave outlook here.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Tuesday, January 12, 2010

An Elliott delight tonight. Everything is just right again. All the more, everything still is the same. This in a very good way — confirming the same bear spotted months ago still climbs a greased slope ... with increasing weakness only further revealed.

Thus, observations made over the past six months remain as valid as ever. Likewise consistent are the same demonstrations substantiating Elliott wave form: but a counter-trend rally in a bear market that began October 2007 is nearing its completion.

An extended fifth wave is forming. Relative strength (RSI) and momentum (MACD) continue fading. Yet, too, these measures continue on the positive side of their respective ranges, confirming, indeed, a C-wave is forming.

What used to be waves i-v of 5 now are waves 1-5 of i of 5. Duly note how most recent volume spike ("get your [capital starved] bank on") coincided with completion of the third wave (wave iii) of wave 5. A similar third-wave volume spike occurred at the completion of wave iii of 3 and wave iii of 1 (noted via green dots). Interesting.

Yesterday's expansion of the NYSE New 52-week High-Low differential to a new high, post-March '09 bottom (not matched on NASDAQ), suggests wave 5 of C of (B) might be some days away from completing. Then again, maybe it is entirely appropriate an NYSE new-high peak coincide with the end of a major counter-trend rally. Might not growing euphoria — widening [ETF-driven] NYSE-listed share love — signal top?

Either way, given what has passed these last 2 to 10+ years, that major indexes are likely to challenge lowest levels reached over the interim, minimally, yet again appears a probability whose moment of truth is drawing near.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Monday, January 11, 2010

Tonight, over at Barry Ritholtz's Big Picture blog I came across his post highlighting the cover on this week's Economist magazine. Pictured above Manhattan are translucent spheres, and the headline reads, "Bubble warning: Why assets are overvalued."

Barry asks, "Is this a contrarian signal?"

To which I replied...

"Given the crowd the Economist appeals to I suspect this is a cover delivering a message most everyone reading it believes themselves smart enough to avoid, and because THAT is the consensus, most probably will fail to get out of the way once the Government Finance Bubble bursts. Indeed, I fear it is rather likely this period of “recovery” effected by the lender of last resort was in fact the last chance to batten down the hatches before all hell breaks loose (and woefully few probably have done so)."

"It is my contention the short side of the trade more or less is in control of the market, presently working to build positions, and at the same time shake out weak hands.

"If you consider that, the multi-month trend in the CBOE Put/Call ratio is heavily leaning to the call side, and consider this in the context of the phantom economic recovery backed by much hot air and absolutely nothing of meaningful substance, then you simply must come to the conclusion that, short positions are being hedged with the preponderance of these call options whose relative excess over the past year is plain to see.

"Of course, an additional likelihood is that, in conjunction with short position hedging, long positions in such strong hands as probably effected the market’s rescue early last year are averaging up sales of their long positions via [covered] call options written and sold to institutional interests mentioned in the article ... which options then are being exercised by their purchasers following efforts to goose markets higher via the CME, allowing strong hands currently long equities seamless opportunity to trim their positions.

"Likewise, in the course of the market’s fits and starts higher those building short positions probably are simultaneously managing long positions whose trade on the way up helps offset the cost of hedging short positions. Naturally, these long positions will come in handy once weak-handed shorts are out of the way and it is time to detonate an explosion of sell orders intending to precipitate an avalanche.

"Think this unlikely? Well, then, ask Mary Shapiro about that uptick rule! It’s still AWOL and that is not cool if you are 'mother, apple pie and Chevrolet' when it comes to thinking about the stock market.

"So, here is my biggest concern. Although there is no way of knowing with certainty — indeed, we could see the next 12-24 months trading in the range established over the past year (which range, presently, we likely are very near the upper end) — there’s a risk we could see a brief period in which a collapse dwarfing autumn 2008 unfolds, featuring days on end when circuit breakers kick in and trading becomes very chaotic, allowing very few opportunities for the greater bulk of investors to get out. This is my greatest fear."

No doubt, we find ourselves amidst an extraordinary moment in modern financial history. Yet there is no reason to believe the stock market is operating any differently than it ever has.

I strongly doubt the Federal Reserve is at present directly acting to buoy stocks. Yet going into bottom last March, and for some time following the turn higher? Maybe. Having been behind the credit market "fix," odds of their being trapped long equities were slim, so buying near bottom would have been a fairly safe bet. However most, if not all, of their position (if there ever was one) probably has been sold back to the market by now.

And so we turn to the fact King Dollar Wrecker has yet to be confirmed for a new term as Fed Chairman. Holds on his nomination in the Senate have been placed, and there is concern the Monkey won't be confirmed by the end of the month when his current term expires. Indeed, sanguine expectations appear to be fading.

So, what if an outlier awaits? What if the Senate outright rejects Bernanke? Might Team Fraud quake? Has the President made a fatal mistake?

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

Be Strong

Matthew 24:13

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